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Frank Burns, a manager at a commercial tire company in Spokane, Wash., has been the target of annuity sales pitches several times, but he has always demurred, wary of the products’ complexities and costs. So why, when he turned 57 this year, did he sink $500,000 of his nest egg into an annuity?
A good tool an individual investor can use when deciding between managing their own investments for "retirement withdrawal purposes" verses owning an annuity is Portfolio Visualizer linked (here). Obviously PV data is using past performance data, but it provides a framework to compare future scenarios. The article lays out a best case scenario for annuity products today: A $200K lump sum annuity would pay out $16K over a single lifetime. The problem is there is no COLA (inflation) increases with these annuities. $16K needed to grow to over $36K just to keep up with inflation over the last 30 years.
Using data from the last 30 years of market returns, VWINX (port 1), VWELX (port 2), and PRWCX (port 3) all handled a steady $16K payout with great success. By the way, this is how insurance companies get rich. They invest in conservative instruments with your money and payout a diminshing amount of real money. Look at the remaining balance for all 3 portfolios. That's what the insurer gets to keep. Here's are the numbers:
Add a COLA (inflation) to the initial $16K and, VWINX fails after 25 years (inflation adjusted payouts rise from $16K (year 1) to over $32K (year 25). One note: Had I used 1985 as a start date verses 1987, VWINX would have succeeded over the next 32 years. Market returns (risk) matters and are the very thing that frighten investors towards the safety of annuities.
After 30 years, VWELX had a remaining balance of $100K (inflation adjusted $46K) while providing inflation adjusted payouts of $16K (year 1) increasing yearly to over $36K (year 30). Not bad, but worrisome for longevity risk in one's 90's.
PRWCX also provided inflation adjusted payouts over 30 years while growing to $800K (inflation adjusted $349K). Pretty impressive!
Inflation Adjusted Annuities were not even mentioned in the article.
Here are the numbers for both VWELX (Portfolio1) and PRWCX (Portfolio 2) where yearly payouts increased with inflation:
A good tool an individual investor can use when deciding between managing their own investments for "retirement withdrawal purposes" verses owning an annuity is Portfolio Visualizer. Obviously PV data is using past performance data, but it provides a framework to compare future scenarios.
@bee, thank you for the insightful analysis. Will work with PV later today.
@Mark. Finding alternative income funding sources during market downturns would definitely help.
Income sources that are non - market correlated would be a good addition to a retirement portfolio. This would help handle market sequence risk (withdrawing during a downturn in the market).
Some alternative income sources to help deal with market sequence risk: - Cash account - Hard to keep up with inflation - Non-correlated assets (bonds) -@Sven suggests REITS and Utes...see below - HELOC - Use Home equity during down years in the market (so long as the bank doesn't call your HELOC in). Needs to be paid back, with interest. - Reverse Mortgage - Up front costs are a negative. Better to open in your 60's and carry a zero balance on the reverse mortgage thus allowing the loan value to grow over time. - Rental Income - - Part time work income - - Temporarily Reduce spending - Live on Less Income - Sell some of your stuff - Nothing wrong with turning your collectibles back into money especially if they have appreciated. Your kids will thank you for saving them the trouble.
Adding to your tread above. What else you consider non-market correlated sources? There are few funds and sectors that have lower correlation to the broader stock index (but difficult to have correlation <0.1 over say 5-10 years):
Fidelity Real Estate Income, FRIFX, 50% REIT bonds, 50% REIT equity and yields 4% (ER 0.7%) Vanguard Utility ETF, VPU and yields 3.3% (ER 0.1%) and iShare equivalents
The following is going to sound negative, so please take it in the spirit it is offered - an attempt to explain why these posts (and what many tend to think) about annuities and insurance in general start from a perspective that misses the point.
Insurance is a way to diversify risk, not dissimilar to the way mutual funds diversify risk. In both products, the company providing the service takes its cut (which should be fair, not excessive). In both, you're giving away potential gains in exchange for knowing you risk losing less. The more amount of risk you shed, the lower your potential gains.
With funds, instead of gambling on a few stocks in the hope of hitting the jackpot, you spread your risks and dilute your best case. With insurance, the risks are spread across people (not investments).
When you buy accident insurance, you give up a pile of cash (and the earnings you could have made) in exchange for not losing big if you crash into someone. If you don't think that's worthwhile, buy the minimum insurance legally required, and put your pockebook on the line. That's a risk people seem to understand, so they're willing to pay even though most of them are safe drivers who lose on the deal.
Annuities (or pensions) are different. People do not seem to fully appreciate the risks (both types and probability distributions). They are convinced that the insurance company is out to rip them off (some are), and so conclude they must be able to do better themselves even though they're assuming 100% of the risk.
Thus we get apples and orange comparisons - fixed rate immediate annuities (with no rate of return risk) vs. securities (with sequence and other risks), rather than comparing variable annuities with mutual funds.
"Success" was shown above by picking one or two points in time. Who believes that an 8% withdrawal rate ($16K out of $200K portfolio) has a 100% chance of success over 25 years, let alone with inflation adjustments?
Rather, one would need to allocate additional money to this relatively conservative portfolio to ensure not running out of money. With an annuity that guaranteed success, one could invest the remainder for pure growth. IMHO that would make for a more interesting comparison.
I think DIY analyses are great for getting a feel for how numbers behave. I'm less sanguine about the conclusions drawn from these exercises. I'll end with a graph from Wade Pfau showing his predicted success rates over time for a 60/40 portfolio and different inflation adjusted withdrawal rates. I can't come close to these figures with portfolio visualizer, but I trust his expertise more than mine. The image is from the following article, though it in turn is excerpted from elsewhere: https://www.immediateannuities.com/pdfs/articles/next-evolution-in-defined-contribution-retirement-plan-design.pdf
@ron, I believe their are other funds and fund managers as good as PRWCX.
One of PRWCX mandates is to capture the markets upside with half the downside capture. Upside/downside capture is a matrix I need to dedicate some time.
I believe Healthcare funds, in general, have a long history of doing just this. Will it continue for the next 30 years...your guess?
I am very impressed with Fidelity's Select funds. I presently own FSRPX and FSMEX and FSUTX.
Primecap funds seem to achieve more upside capture even though volatility is higher. As investors we have to train ourselves to the nature of risk and volatility...they are not one in the same. Upside and downside capture might be a better way to measure risk.
How the market and more importantly your investments perform in the first few years of retirement have a great bearing on their ability to sustain your particular withdrawal rate.
If you can have a flexible withdrawal rate or a variety of sources of income to avoid sequence risk (withdrawing from market assets when the market is down) you will be more likely to meet your optimum withdrawal rate and potentially grow your assets.
@msf, I still have lots to learn about annuity. At present I am not sure wanting to give up $500K for an annuity with insurance companies. What is your assessment on Vanguard variable annuity products?
Got to dash now, and I'm not sure what your concerns are, so I'll toss out a few factoids and we can pick this up later (note, I haven't checked on Vanguard's annuity recently):
- All annuities, including Vanguard's, are insurance contracts. Vanguard's is issued by Transamerica
- Vanguard's VA, like most, is a deferred annuity. When you annuitize, it converts to a fixed immediate annuity. (Vanguard used to offer an immediate variable annuity, but no longer.)
- It started offering a GWLB rider (at what I recall was a reasonable price) several years ago. I'd have to check on pricing and terms now. The idea of GWLB riders is that instead of annuitizing, you withdraw money annually, and that's guaranteed not to drop below a locked in value. I don't believe they're usually a good value, though my recollection is that Vanguard prices its rider reasonably.
- During the accumulation phase (when it's a VA), you don't have to worry about the insurance company (the value of the annuity is backed by the funds it owns). But any riders, like GWLB do depend on the soundness of the insurer. Haven't checked on Transamerica yet.
- For accumulation period, Vanguard VA is a very good annuity. Very low cost, no surrender penalties, Vanguard (cheap) funds. Added benefit - it counts toward Flagship status.
- I'm not convinced of the value of any deferred annuity, except in limited situations, e.g. if you like to trade a lot (in which case the tax shelter is valuable; otherwise a tax-efficient mutual fund might do better), or you want to invest in bond funds.
If you're looking at this for an income stream, then either you'll wind up with a fixed immediate annuity with Vanguard, or you'll rely on its GWLB rider. I can give more thoughts on that, if that's where you're heading.
The following is going to sound negative, so please take it in the spirit it is offered - an attempt to explain why these posts (and what many tend to think) about annuities and insurance in general start from a perspective that misses the point.
Insurance is a way to diversify risk, not dissimilar to the way mutual funds diversify risk. In both products, the company providing the service takes its cut (which should be fair, not excessive). In both, you're giving away potential gains in exchange for knowing you risk losing less. The more amount of risk you shed, the lower your potential gains.
With funds, instead of gambling on a few stocks in the hope of hitting the jackpot, you spread your risks and dilute your best case. With insurance, the risks are spread across people (not investments).
When you buy accident insurance, you give up a pile of cash (and the earnings you could have made) in exchange for not losing big if you crash into someone. If you don't think that's worthwhile, buy the minimum insurance legally required, and put your pockebook on the line. That's a risk people seem to understand, so they're willing to pay even though most of them are safe drivers who lose on the deal.
Annuities (or pensions) are different. People do not seem to fully appreciate the risks (both types and probability distributions). They are convinced that the insurance company is out to rip them off (some are), and so conclude they must be able to do better themselves even though they're assuming 100% of the risk.
Thus we get apples and orange comparisons - fixed rate immediate annuities (with no rate of return risk) vs. securities (with sequence and other risks), rather than comparing variable annuities with mutual funds.
"Success" was shown above by picking one or two points in time. Who believes that an 8% withdrawal rate ($16K out of $200K portfolio) has a 100% chance of success over 25 years, let alone with inflation adjustments?
Rather, one would need to allocate additional money to this relatively conservative portfolio to ensure not running out of money. With an annuity that guaranteed success, one could invest the remainder for pure growth. IMHO that would make for a more interesting comparison.
I think DIY analyses are great for getting a feel for how numbers behave. I'm less sanguine about the conclusions drawn from these exercises. I'll end with a graph from Wade Pfau showing his predicted success rates over time for a 60/40 portfolio and different inflation adjusted withdrawal rates. I can't come close to these figures with portfolio visualizer, but I trust his expertise more than mine. The image is from the following article, though it in turn is excerpted from elsewhere: https://www.immediateannuities.com/pdfs/articles/next-evolution-in-defined-contribution-retirement-plan-design.pdf
Why I have large positions of Primecap in my Vanguard Annuity and IRA and Roth IRA's
@JohnN, as this thread weaves I realize I may have overshadowed your original intent for a discussion about annuities. I believe @msf brought the conversation back to that place.
I will share my own personal story with regard to annuities.
I was 51 (2010) when I was presented with a work related downsizing scenario. It seems teaching kids about the cloud, robots, and all things dirty (shop) was not in the best interest of our children. After 28 years of being bashed as a non-essential part of a child's development I decided to see what my retirement options were.
I qualified for early retirement which provided a less than adequate income stream going forward, but I also was given the option to buy a extra annuity. Long story-short... their was an annuity option that paid out 8.95% per thousand and its cash value was diminished on a 75%/25% basis. Meaning 75% of the 8.95% come from the insurer and 25% of the 8.95% came from the cash value of the annuity. This seemed too good to be true. I enlisted a few professionals to look at this arrangement and they too concluded that this was a good deal.
I dropped over$300k (75%) of my life savings to "meet my income needs". Eight years later my meager retirement pension (with COLAs) has slowly crept up to my non-COLA annuity.
This made me realize...
The big elephant in the room is Inflation. As retirees, we need to grow our assets so that we can withdraw inflation adjusted income.
Most annuities do not offer inflation adjusted income. That sent me elsewhere in this thread towards assets like equities that often "grow with inflation".
So @JohnN and @msf...any thoughts on inflation adjusted annuities?
Granted: Investments in mutual funds (or individual stocks and bonds) are NOT guaranteed and annuities ARE guaranteed. But, with the former I own the security “come hell or high water”. In other words, I’m pretty certain of getting something back in just about any eventuality that may befall the economy. In the case of the latter (an annuity), I own a written guarantee from an insurance company.
Which of those should I prefer to hold in the event of a financial disaster (say something like 1929)?
I ask because I think the risk of being self-invested is sometimes a bit overblown. I believe a truly diversified portfolio, containing not only equities but also precious metals, high grade bonds, international currencies, cash, and perhaps some hedge fund like investments should be able to survive (with modest losses) just about any financial calamity we might encounter. But I’m not too certain about how much that written guarantee from even a top rated insurer would be worth under really dire circumstances. Obviously their investments (whatever they invested my monies into) would sustain substantial losses along with other investors.
(Admittedly I’m someone who knows little about insurance companies / annuities.)
I think the risk of annuity failure is a bit overblown. Not that I own or have owned any. Most of us have written guarantees from insurance companies for all sorts of other things. If you really think dire circumstances would cause them to default, yeah, you should not entertain the idea. The article gets into all this somewhat.
I agree with davidrmoran that the risks are somewhat overstated. While I'm not fond of anecdotal information, let me offer you a little, not for odds but for a sense of the process when an insurer fails. David gave you an article that spoke about a couple of $2B insurers failing. Pish-tosh. Chicken feed.
Executive Life, holding piles of junk bonds, deserved to fail. ELNY, its separate NY subsidiary probably did not. NY insurance companies often have separate subsidiaries because NY laws and regulators hold them on a much tighter leash. That didn't stop ELNY policy holders from making a run on the "bank" - all they heard was "Executive Life". No insurer (or bank) can survive that.
(That's right, in 2013, it was still getting wound down.) My parents owned a fixed annuity (accumulation phase) of ELNY. As the background/status page above says, nearly all "regular" (i.e. not structured settlement) policy holders saw their policies taken over by MetLife. As part of the takeover, they were locked in for a few years, saw their interest rates drop to the lowest amount allowed by the contract, but were paid 100¢ on the dollar and were ultimately able to exchange their policy for another at MetLife or elsewhere. As I recall, people who were receiving payments at the time continued to do so.
This is very similar to what happens with failed banks. The FDIC works with banks to find a suitor, rarely are assets above the government limits put at risk.
It's very important to do your research on how sound the insurance company is if you're relying on riders, fixed interest, or payouts (not too important for pure VAs that keep assets in separate accounts). If the payout rate seems too high, it probably is. Here's a good starting point:
Default isn’t the only serious risk to consider when purchasing an annuity. Even modest inflation can eat away at your annuity’s buying power and drastically cut into your lifestyle.
Hi @hank et al @bee and I were writing about the same time with similar thoughts in places.
I'll name this the, "#%#* happens, eh?" reply.
We're approaching the 10 year mark for the market melt. This write is in regards to insurance companies (policies of all forms-annuities and markets in general). Here's a recap of my experience with this period from the eyes of family and friends during the period late in 2008/early 2009 when things looked very dire: Being the only person many of these folks knew who had a "face" into the markets and paid attention; I received a lot of phone calls and emails about what was taking place. Our house as well as these folks received paper mail as to, "don't worry your investments are safe, including stable value accounts". Some of my personal phone calls and emails revolved into; " should I pull my money from my bank account and just hold the cash?, I'm selling my IRA and buying gold coins and the biggest and impossible to assure or define; "What is going to happen???" Folks who paid some attention to the news and markets were scared as hell; many others didn't really "get it". These folks were mostly day to day, and didn't have much in any form of savings. As to annuities at this time; it was not only those who relied upon monthly payments from active annuities, but also all of the accounts that were held in the form of home and auto insurance, life insurance policies, etc. relative to the financial ability(s) of insurance companies. During this time of great uncertainty, one could have been concerned, not only to the ability to honor insurance contracts of any kind in real time; but "if" the contracts could be honored, would there be a delay in payments??? Monthly payouts, I am sure; were critical to lots of folks.
>>>Below from previous writes:
1. (from July 17, 2018) ---20 largest annuity companies...sales $ in U.S. (2012 data) https://www.thinkadvisor.com/2012/03/30/top-20-companies-for-annuity-sales/ Annuities are "guaranteed" by the full faith and credit of the issuing organization. Number 6 in the above list was on the crash list during the market melt of 2008/2009. Lincoln Financial (a few days before the closing of the TARP program) purchased a small savings and loan in Indiana in order to qualify for a monetary bail out. #%#* happens, eh? Everyone has their own needs and plans accordingly. Catch
2. (from April, 2017) Lincoln Financial/Insurance just about bought the farm along with its policyholders during the market melt. I recall that the Newton Savings and Loan that was purchased allowed this company to apply for TARP money 1 or 2 days before that window closed. The Delaware Investments sale was part of a "pay the government monies back" program. Hoping the economy doesn't travel any of the paths again. Lots of folks I know we very much concerned about a sinking financial ship of state. https://www.google.com/#q=lincoln+financial+bailout&* http://www.badfaithinsurance.org/reference/General/0715a.htm
Catch
3. (from August, 2012) During the market melt I happened to follow Lincoln National. Through some fancy work and the chance that they were able to buy a small bank or savings/loan failing in Indiana, allowed them to qualify for TARP relief monies. My recall is that the request form was filed about 18 hours before the cutoff period. One may hope for such a program in the future if there were to be another melt to protect the insurance companies who were not part of the required TARP funding for some banks; whether they chose to take the money or not. As to whether one would receive a future annuity payment under duress monetary circumstances has yet to be discovered; but the possibility exists. At the least, one could be in line for some amount of payment via state programs; which would be overwhelmed by a serious system failure. The lender of last resort, being the Federal government/Treasury may only guarantee a certain amount of product under the worst circumstances. While none of this may present itself during my lifetime; I believe not too many folks realized just how serious some of the non-banking sectors were being hit on the liquidity side of the 2008 event. Not unlike the ability of banking and related institutions to flow "your" money to you as they choose during a financial crisis; I fully expect similar language is buried somewhere inside of many insurance products. Of last resort, of course; is the full ability of the U.S. President to engage presidental directives for whatever purpose may be necessary to facilitate a smooth and functional system. Regards, Catch
>>>Lastly, the monetary system is still gamed by the very large institutions (being the "we'll pay the fine, but do not admit any wrong doing thing). We regular folks remain in a "full faith and credit" system. --- This is part of a June, 2018 report from the B.I.S. (Bank of International Settlements) regarding the "gaming", IMHO.
Banks’ window-dressing: the case of repo markets Window-dressing refers to the practice of adjusting balance sheets around regular reporting dates, such as year- or quarter-ends. Window-dressing can reflect attempts to optimise a firm’s profit and loss for taxation purposes. For banks, however, it may also reflect responses to regulatory requirements, especially if combined with end-period reporting. One example is the Basel III leverage ratio. This ratio is reported based on quarter-end figures in some jurisdictions, but is calculated based on daily averages during the quarter in others. The former case can provide strong incentives to compress exposures around regulatory reporting dates – particularly at year-ends, when incentives are reinforced by other factors (eg taxation). Banks can most easily unwind positions around key reporting dates if markets are both short-term and liquid. Repo markets generally meet these criteria. As a form of collateralised borrowing, repos allow banks to obtain shortterm funding against some of their assets – a balance sheet-expanding operation. The cash received can then be onlent via reverse repos, and the corresponding collateral may be used for further borrowing. At quarter-ends, banks can reverse the increase in their balance sheet by closing part of their reverse repo contracts and using the cash thus obtained to repay repos. This compression raises their reported leverage ratio. The data indicate that window-dressing in repo markets is material. Data from US money market mutual funds (MMMFs) point to pronounced cyclical patterns in banks’ US dollar repo borrowing, especially for jurisdictions with leverage ratio reporting based on quarter-end figures (Graph III.A, left-hand panel). Since early 2015, with the beginning of Basel III leverage ratio disclosure, the amplitude of swings in euro area banks’ repo volumes has been rising – with total contractions by major banks up from about $35 billion to more than $145 billion at year-ends. While similar patterns are apparent for Swiss banks (which rely on quarter-end figures), they are less pronounced for UK and US banks (which use averages). Banks’ temporary withdrawal from repo markets is also apparent from MMMFs’ increased quarter-end presence in the Federal Reserve’s reverse repo (RRP) operations, which allows them to place excess cash (right-hand panel, black line). Despite the implicit floor provided by the rates on the RRP (yellow line), there are signs of volatility spikes in key repo rates around quarter-ends (blue line). Such spikes may complicate monetary policy implementation and affect repo market functioning in ways that can generate spillovers to other major funding markets, especially if stress events coincide with regulatory reporting dates
Anyway, just a few thoughts for today, as part of my ongoing self therapy for investors. Regards, Catch
A+ @bee for sharing the personal experience. Our situations are not very much dissimilar. (How’s that for a double negative - DT?)
What really strikes me is that both of us retired about the same time and about the same age and that we were truly blessed to have spent much of that period during a period of “disinflation.” Note: Disinflation does not mean “no inflation” (must be double negative day). However, it does mean “slow or decelerating inflation”. So, as dramatic as price increases may have seemed to those of us 20+ years into retirement (still trying to get my head around $60,000 pickup truck prices), imagine how horrific our experiences might have been under a protracted period of rapidly accelerating inflation.
One thing I’d suggest to younger folks is so obvious none have mentioned it. Owning is preferable to renting. Especially your place of residence. And, I think the same might apply to owning a vehicle rather than leasing where you’re having to start anew whenever lease expires.
Inflation, the flip side of the "magic of compounding". I'm of two minds about this.
On the one hand, it's a real concern if you're looking decades out, so it's worth considering inflation adjusted annuities. On the other hand, they may not be the best way to address this risk.
Thinking of annuities as insurance (see my long post above), ISTM one buys annuities not so much for the monthly stream of income (though that's a part), but more as real, catastrophic insurance. Where the "catastrophe" is living "too long".
That's why I'm impressed with the idea of longevity insurance. Sure, you might lose by dying early - ISTM the real loss there is the dying part, not the foregone money. Overall, it's a way to buy insurance for the real risk, without paying to insure earlier years where your being alive is more of a sure thing (at least you hope so).
Another approach, often mentioned here, is delaying SS until age 70. SS is inflation adjusted, so by pushing it out you can get larger inflation-adjusted payments to cover your minimum living expenses for the rest of your life.
An approach to bridging the gap from retirement to age 70 is, yes, to use an annuity. One you rarely hear about: a "temporary life annuity". This could make payments up to age 70 (and then stop), but only so long as you're alive. The idea is that if you don't make it to 70, you don't need those monthly payments while waiting for SS to kick in. By giving up your rights to money should you die, you need to pay less for this policy.
Here's an article referencing work by Kitces and Pfau that says that inflation-adjusted SPIAs only pay off for the relatively small percentage of people who live very long lives. I've read a better writeup (probably a Kitces column) but can't find it now. It turns out that it takes decades for the value of the inflation-adjusted policy to surpass the value of the vanilla annuity. https://retirementincomejournal.com/article/spias-are-slow-to-pay-off-kitces-and-pfau/
An add: If one is able to generate "enough" income through all channels; being a possible company pension, traditional IRA's, 403B's, 457's, and SS, yet still has monies for an annuity; then a consideration of "tax efficient" investments may be in place regarding taxes. If one invests in "tax efficient" funds or whatever similar choice, tax for at least part of these of this investment type may be treated at a long term capital gains rate (annual distributions and personal withdrawals). Another benefit is that one still has access to how much money and when they choose to take a withdrawal for whatever reason. To the best of my knowledge, payouts from an annuity are taxed as "ordinary income", with the possibility of a higher tax rate; and in particular with other payouts from other sources than may all "pile" more money into the "ordinary income" tax bucket. Too much "ordinary income" in retirement, is none the less; a good problem to have, yes? My 2 cents.
An add: If one is able to generate "enough" income through all channels; being a possible company pension, traditional IRA's, 403B's, 457's, and SS, yet still has monies for an annuity; then a consideration of "tax efficient" investments may be in place regarding taxes. ...
To the best of my knowledge, payouts from an annuity are taxed as "ordinary income", with the possibility of a higher tax rate;
If one has enough income through all (non-annuity) channels, then IMHO one should not be considering an annuity. It's best used to ensure that one has "enough" income, not "excess" income.
Note, IRA and qualified retirement plan distributions are not "income" in the sense of a steady stream of payments. They are merely tax events. Moving a non-dividend paying stock from an IRA to a taxable account (e.g. to satisfy RMD) creates a tax obligation but no income. So I would be careful in what I called "income" for cash flow purposes.
If by annuity "payouts" you mean checks from annuitizing, they are tax free to the extent that the payouts represent a return of principal, which is prorated over life expectancy (or period certain as necessary). If you mean withdrawals without annuitizing (e.g. GWLB payments), the ordering is (taxable) income first, but once you draw down to principal, return of principal is still tax free.
The opposite of Roth IRA ordering (where principal comes out first, and taxable earnings, e.g. if you haven't owned for five years, last).
@msf Agree with your points (no tax on return of principal, etc.) I didn't intend to misdirect one's reading/understanding of my write. If there is a sizable amount in one's/couples traditional IRA's; after the 1st year RMD ,which is about 3.65%, the percent rate creeps towards 4% within a few years. Only saying with this, is that an individual or in particular a couple could find a mandatory withdrawal from IRA's to cause other tax events, too. All of these points, as is the purpose of this forum; is too stimulate brain cells with current and forward thinking about "all" investing circumstances and choices available.
As I noted previous, this should be a "good problem" to have regarding taxation overall.
As we've noted prior (with this and in years past), not all choices will fit all individual circumstances. I recall you and I have traveled this road before (annuity related) with questions from others over the years.
As this house is no longer in a position to contribute through the normal employed methods of Roth IRA's, 401k's and related; if we were to inherit a sizable amount of money today, a consideration would be Fidelity's Personal Retirement Annuity. Disclosure: this house is a 40 year Fidelity customer.
Yup. As income (even non-taxable) goes up, more of SS becomes taxable; as it rises higher, IRMAA surcharges begin to kick in on Medicare Parts B and D. (Even if you're buying Medicare Advantage Part C instead of Part D drugs, you're still subject to IRMAA on Part D.)
Allow me to offer a few more thoughts on insurer safety, especially as you mentioned Lincoln Financial.
First, I regard 2008 as once in a lifetime event (at least going by the biblical 70 year span). I don't know about you, but aside from my aspirations of living forever, I don't expect to be around for the tricentennial. (An annuity probably isn't a good idea right now for anyone who does.)
But when events like that happen, they affect all financial institutions. You get shotgun weddings (JPM Chase and WaMu), and extraordinary aid across the board. That is, lots of emergency measures outside of the normal protections and procedures.
Insurance companies are not much different from banks - they take in money from creditors (policy holders, depositors), incur liabilities to those creditors, and invest the proceeds until called upon to meet those liabilities. Being similar to banks, they were similarly vulnerable. That some had to kludge their way into getting the same aid as banks I view as incidental.
Since being a bank (or holding company) was a requirement to participate in the TARP Capital Purchase Program, many ersatz banks acted to meet that formality, several at the last minute.
If the fact that some insurers accepted aid (and added regulatory supervision) at that time makes one leery of insurers generally, then what are we to think of the mutual fund industry? A large number of money managers accepted government aid in the form of "after the fact" Treasury insurance for their MMFs to prevent runs on their funds. By "after the fact" I mean that the insurance was created and offered after the Reserve Fund broke a buck. Something like being offered flood insurance after a hurricane makes landfall but before the oncoming water reaches your stoop.
Do you still trust mutual fund companies? Should we? I think so. Just as I trust the better insurers. That's not to say there isn't risk everywhere. It's just that some of it is way down on my list of things to worry about.
I'd like to highlight a point Stan made, because it is so often missed. Indexed annuities are just CDs.
Well not exactly, but close enough. The point is that indexed annuities are fixed annuities - their interest rate may not be known in advance, but all they're doing is paying you interest based on something well defined. These are not VAs.
You can get the same sort of product outside of an annuity with a CD or with a bond.
For example, here's a (nine page!) prospectus for a new issue JPMorgan Chase CD currently being sold through Fidelity (and probably elsewhere). It matures in seven years, at which time it pays principal (guaranteed by FDIC) and interest equal to 100% of the price appreciation of the S&P 500 (not including dividends). But this is capped at 80% (roughly 8.76% annualized). If the S&P 500 index is lower in seven years than it is on the date the CD is issued, you still get your principal back, without interest.
Comments
The article lays out a best case scenario for annuity products today:
A $200K lump sum annuity would pay out $16K over a single lifetime. The problem is there is no COLA (inflation) increases with these annuities. $16K needed to grow to over $36K just to keep up with inflation over the last 30 years.
Using data from the last 30 years of market returns, VWINX (port 1), VWELX (port 2), and PRWCX (port 3) all handled a steady $16K payout with great success. By the way, this is how insurance companies get rich. They invest in conservative instruments with your money and payout a diminshing amount of real money. Look at the remaining balance for all 3 portfolios. That's what the insurer gets to keep. Here's are the numbers:
Add a COLA (inflation) to the initial $16K and,
VWINX fails after 25 years (inflation adjusted payouts rise from $16K (year 1) to over $32K (year 25). One note: Had I used 1985 as a start date verses 1987, VWINX would have succeeded over the next 32 years. Market returns (risk) matters and are the very thing that frighten investors towards the safety of annuities.
After 30 years, VWELX had a remaining balance of $100K (inflation adjusted $46K) while providing inflation adjusted payouts of $16K (year 1) increasing yearly to over $36K (year 30). Not bad, but worrisome for longevity risk in one's 90's.
PRWCX also provided inflation adjusted payouts over 30 years while growing to $800K (inflation adjusted $349K). Pretty impressive!
Inflation Adjusted Annuities were not even mentioned in the article.
Here are the numbers for both VWELX (Portfolio1) and PRWCX (Portfolio 2) where yearly payouts increased with inflation:
Income sources that are non - market correlated would be a good addition to a retirement portfolio. This would help handle market sequence risk (withdrawing during a downturn in the market).
Some alternative income sources to help deal with market sequence risk:
- Cash account - Hard to keep up with inflation
- Non-correlated assets (bonds) - @Sven suggests REITS and Utes...see below
- HELOC - Use Home equity during down years in the market (so long as the bank doesn't call your HELOC in). Needs to be paid back, with interest.
- Reverse Mortgage - Up front costs are a negative. Better to open in your 60's and carry a zero balance on the reverse mortgage thus allowing the loan value to grow over time.
- Rental Income -
- Part time work income -
- Temporarily Reduce spending - Live on Less Income
- Sell some of your stuff - Nothing wrong with turning your collectibles back into money especially if they have appreciated. Your kids will thank you for saving them the trouble.
Adding to your tread above. What else you consider non-market correlated sources? There are few funds and sectors that have lower correlation to the broader stock index (but difficult to have correlation <0.1 over say 5-10 years):
Fidelity Real Estate Income, FRIFX, 50% REIT bonds, 50% REIT equity and yields 4% (ER 0.7%)
Vanguard Utility ETF, VPU and yields 3.3% (ER 0.1%) and iShare equivalents
Insurance is a way to diversify risk, not dissimilar to the way mutual funds diversify risk. In both products, the company providing the service takes its cut (which should be fair, not excessive). In both, you're giving away potential gains in exchange for knowing you risk losing less. The more amount of risk you shed, the lower your potential gains.
With funds, instead of gambling on a few stocks in the hope of hitting the jackpot, you spread your risks and dilute your best case. With insurance, the risks are spread across people (not investments).
When you buy accident insurance, you give up a pile of cash (and the earnings you could have made) in exchange for not losing big if you crash into someone. If you don't think that's worthwhile, buy the minimum insurance legally required, and put your pockebook on the line. That's a risk people seem to understand, so they're willing to pay even though most of them are safe drivers who lose on the deal.
Annuities (or pensions) are different. People do not seem to fully appreciate the risks (both types and probability distributions). They are convinced that the insurance company is out to rip them off (some are), and so conclude they must be able to do better themselves even though they're assuming 100% of the risk.
Thus we get apples and orange comparisons - fixed rate immediate annuities (with no rate of return risk) vs. securities (with sequence and other risks), rather than comparing variable annuities with mutual funds.
"Success" was shown above by picking one or two points in time. Who believes that an 8% withdrawal rate ($16K out of $200K portfolio) has a 100% chance of success over 25 years, let alone with inflation adjustments?
Rather, one would need to allocate additional money to this relatively conservative portfolio to ensure not running out of money. With an annuity that guaranteed success, one could invest the remainder for pure growth. IMHO that would make for a more interesting comparison.
I think DIY analyses are great for getting a feel for how numbers behave. I'm less sanguine about the conclusions drawn from these exercises. I'll end with a graph from Wade Pfau showing his predicted success rates over time for a 60/40 portfolio and different inflation adjusted withdrawal rates. I can't come close to these figures with portfolio visualizer, but I trust his expertise more than mine. The image is from the following article, though it in turn is excerpted from elsewhere:
https://www.immediateannuities.com/pdfs/articles/next-evolution-in-defined-contribution-retirement-plan-design.pdf
One of PRWCX mandates is to capture the markets upside with half the downside capture. Upside/downside capture is a matrix I need to dedicate some time.
I believe Healthcare funds, in general, have a long history of doing just this. Will it continue for the next 30 years...your guess?
I am very impressed with Fidelity's Select funds. I presently own FSRPX and FSMEX and FSUTX.
Primecap funds seem to achieve more upside capture even though volatility is higher. As investors we have to train ourselves to the nature of risk and volatility...they are not one in the same. Upside and downside capture might be a better way to measure risk.
How the market and more importantly your investments perform in the first few years of retirement have a great bearing on their ability to sustain your particular withdrawal rate.
If you can have a flexible withdrawal rate or a variety of sources of income to avoid sequence risk (withdrawing from market assets when the market is down) you will be more likely to meet your optimum withdrawal rate and potentially grow your assets.
- All annuities, including Vanguard's, are insurance contracts. Vanguard's is issued by Transamerica
- Vanguard's VA, like most, is a deferred annuity. When you annuitize, it converts to a fixed immediate annuity. (Vanguard used to offer an immediate variable annuity, but no longer.)
- It started offering a GWLB rider (at what I recall was a reasonable price) several years ago. I'd have to check on pricing and terms now. The idea of GWLB riders is that instead of annuitizing, you withdraw money annually, and that's guaranteed not to drop below a locked in value. I don't believe they're usually a good value, though my recollection is that Vanguard prices its rider reasonably.
- During the accumulation phase (when it's a VA), you don't have to worry about the insurance company (the value of the annuity is backed by the funds it owns). But any riders, like GWLB do depend on the soundness of the insurer. Haven't checked on Transamerica yet.
- For accumulation period, Vanguard VA is a very good annuity. Very low cost, no surrender penalties, Vanguard (cheap) funds. Added benefit - it counts toward Flagship status.
- I'm not convinced of the value of any deferred annuity, except in limited situations, e.g. if you like to trade a lot (in which case the tax shelter is valuable; otherwise a tax-efficient mutual fund might do better), or you want to invest in bond funds.
If you're looking at this for an income stream, then either you'll wind up with a fixed immediate annuity with Vanguard, or you'll rely on its GWLB rider. I can give more thoughts on that, if that's where you're heading.
I will share my own personal story with regard to annuities.
I was 51 (2010) when I was presented with a work related downsizing scenario. It seems teaching kids about the cloud, robots, and all things dirty (shop) was not in the best interest of our children. After 28 years of being bashed as a non-essential part of a child's development I decided to see what my retirement options were.
I qualified for early retirement which provided a less than adequate income stream going forward, but I also was given the option to buy a extra annuity. Long story-short... their was an annuity option that paid out 8.95% per thousand and its cash value was diminished on a 75%/25% basis. Meaning 75% of the 8.95% come from the insurer and 25% of the 8.95% came from the cash value of the annuity. This seemed too good to be true. I enlisted a few professionals to look at this arrangement and they too concluded that this was a good deal.
I dropped over$300k (75%) of my life savings to "meet my income needs". Eight years later my meager retirement pension (with COLAs) has slowly crept up to my non-COLA annuity.
This made me realize...
The big elephant in the room is Inflation. As retirees, we need to grow our assets so that we can withdraw inflation adjusted income.
Most annuities do not offer inflation adjusted income. That sent me elsewhere in this thread towards assets like equities that often "grow with inflation".
So @JohnN and @msf...any thoughts on inflation adjusted annuities?
Granted: Investments in mutual funds (or individual stocks and bonds) are NOT guaranteed and annuities ARE guaranteed. But, with the former I own the security “come hell or high water”. In other words, I’m pretty certain of getting something back in just about any eventuality that may befall the economy. In the case of the latter (an annuity), I own a written guarantee from an insurance company.
Which of those should I prefer to hold in the event of a financial disaster (say something like 1929)?
I ask because I think the risk of being self-invested is sometimes a bit overblown. I believe a truly diversified portfolio, containing not only equities but also precious metals, high grade bonds, international currencies, cash, and perhaps some hedge fund like investments should be able to survive (with modest losses) just about any financial calamity we might encounter. But I’m not too certain about how much that written guarantee from even a top rated insurer would be worth under really dire circumstances. Obviously their investments (whatever they invested my monies into) would sustain substantial losses along with other investors.
(Admittedly I’m someone who knows little about insurance companies / annuities.)
I think the risk of annuity failure is a bit overblown. Not that I own or have owned any. Most of us have written guarantees from insurance companies for all sorts of other things. If you really think dire circumstances would cause them to default, yeah, you should not entertain the idea. The article gets into all this somewhat.
I agree with davidrmoran that the risks are somewhat overstated. While I'm not fond of anecdotal information, let me offer you a little, not for odds but for a sense of the process when an insurer fails. David gave you an article that spoke about a couple of $2B insurers failing. Pish-tosh. Chicken feed.
Executive Life (1991). Now that was a failure. How soon they forget.
https://www.nytimes.com/2008/11/15/business/yourmoney/15money.html
Executive Life, holding piles of junk bonds, deserved to fail. ELNY, its separate NY subsidiary probably did not. NY insurance companies often have separate subsidiaries because NY laws and regulators hold them on a much tighter leash. That didn't stop ELNY policy holders from making a run on the "bank" - all they heard was "Executive Life". No insurer (or bank) can survive that.
The Liquidation of Executive Life of New York
http://capitalstrategies.net/wp-content/uploads/2015/05/August-2013-The-Liquidation-of-Executive-Life-of-New-York.pdf
(That's right, in 2013, it was still getting wound down.) My parents owned a fixed annuity (accumulation phase) of ELNY. As the background/status page above says, nearly all "regular" (i.e. not structured settlement) policy holders saw their policies taken over by MetLife. As part of the takeover, they were locked in for a few years, saw their interest rates drop to the lowest amount allowed by the contract, but were paid 100¢ on the dollar and were ultimately able to exchange their policy for another at MetLife or elsewhere. As I recall, people who were receiving payments at the time continued to do so.
This is very similar to what happens with failed banks. The FDIC works with banks to find a suitor, rarely are assets above the government limits put at risk.
It's very important to do your research on how sound the insurance company is if you're relying on riders, fixed interest, or payouts (not too important for pure VAs that keep assets in separate accounts). If the payout rate seems too high, it probably is. Here's a good starting point:
https://www.insuranceandestates.com/top-25-highest-rated-insurance-companies/
@bee and I were writing about the same time with similar thoughts in places.
I'll name this the, "#%#* happens, eh?" reply.
We're approaching the 10 year mark for the market melt. This write is in regards to insurance companies (policies of all forms-annuities and markets in general).
Here's a recap of my experience with this period from the eyes of family and friends during the period late in 2008/early 2009 when things looked very dire:
Being the only person many of these folks knew who had a "face" into the markets and paid attention; I received a lot of phone calls and emails about what was taking place.
Our house as well as these folks received paper mail as to, "don't worry your investments are safe, including stable value accounts". Some of my personal phone calls and emails revolved into; " should I pull my money from my bank account and just hold the cash?, I'm selling my IRA and buying gold coins and the biggest and impossible to assure or define; "What is going to happen???"
Folks who paid some attention to the news and markets were scared as hell; many others didn't really "get it". These folks were mostly day to day, and didn't have much in any form of savings.
As to annuities at this time; it was not only those who relied upon monthly payments from active annuities, but also all of the accounts that were held in the form of home and auto insurance, life insurance policies, etc. relative to the financial ability(s) of insurance companies. During this time of great uncertainty, one could have been concerned, not only to the ability to honor insurance contracts of any kind in real time; but "if" the contracts could be honored, would there be a delay in payments??? Monthly payouts, I am sure; were critical to lots of folks.
>>>Below from previous writes:
1. (from July 17, 2018) ---20 largest annuity companies...sales $ in U.S. (2012 data)
https://www.thinkadvisor.com/2012/03/30/top-20-companies-for-annuity-sales/
Annuities are "guaranteed" by the full faith and credit of the issuing organization.
Number 6 in the above list was on the crash list during the market melt of 2008/2009.
Lincoln Financial (a few days before the closing of the TARP program) purchased a small savings and loan in Indiana in order to qualify for a monetary bail out.
#%#* happens, eh?
Everyone has their own needs and plans accordingly.
Catch
2. (from April, 2017) Lincoln Financial/Insurance just about bought the farm along with its policyholders during the market melt. I recall that the Newton Savings and Loan that was purchased allowed this company to apply for TARP money 1 or 2 days before that window closed. The Delaware Investments sale was part of a "pay the government monies back" program.
Hoping the economy doesn't travel any of the paths again. Lots of folks I know we very much concerned about a sinking financial ship of state.
https://www.google.com/#q=lincoln+financial+bailout&*
http://www.badfaithinsurance.org/reference/General/0715a.htm
Catch
3. (from August, 2012) During the market melt I happened to follow Lincoln National. Through some fancy work and the chance that they were able to buy a small bank or savings/loan failing in Indiana, allowed them to qualify for TARP relief monies. My recall is that the request form was filed about 18 hours before the cutoff period. One may hope for such a program in the future if there were to be another melt to protect the insurance companies who were not part of the required TARP funding for some banks; whether they chose to take the money or not.
As to whether one would receive a future annuity payment under duress monetary circumstances has yet to be discovered; but the possibility exists. At the least, one could be in line for some amount of payment via state programs; which would be overwhelmed by a serious system failure.
The lender of last resort, being the Federal government/Treasury may only guarantee a certain amount of product under the worst circumstances.
While none of this may present itself during my lifetime; I believe not too many folks realized just how serious some of the non-banking sectors were being hit on the liquidity side of the 2008 event.
Not unlike the ability of banking and related institutions to flow "your" money to you as they choose during a financial crisis; I fully expect similar language is buried somewhere inside of many insurance products. Of last resort, of course; is the full ability of the U.S. President to engage presidental directives for whatever purpose may be necessary to facilitate a smooth and functional system.
Regards,
Catch
>>>Lastly, the monetary system is still gamed by the very large institutions (being the "we'll pay the fine, but do not admit any wrong doing thing). We regular folks remain in a "full faith and credit" system.
--- This is part of a June, 2018 report from the B.I.S. (Bank of International Settlements) regarding the "gaming", IMHO.
Banks’ window-dressing: the case of repo markets
Window-dressing refers to the practice of adjusting balance sheets around regular reporting dates, such as year- or
quarter-ends. Window-dressing can reflect attempts to optimise a firm’s profit and loss for taxation purposes. For
banks, however, it may also reflect responses to regulatory requirements, especially if combined with end-period
reporting. One example is the Basel III leverage ratio. This ratio is reported based on quarter-end figures in some
jurisdictions, but is calculated based on daily averages during the quarter in others. The former case can provide
strong incentives to compress exposures around regulatory reporting dates – particularly at year-ends, when
incentives are reinforced by other factors (eg taxation).
Banks can most easily unwind positions around key reporting dates if markets are both short-term and liquid.
Repo markets generally meet these criteria. As a form of collateralised borrowing, repos allow banks to obtain shortterm
funding against some of their assets – a balance sheet-expanding operation. The cash received can then be
onlent via reverse repos, and the corresponding collateral may be used for further borrowing. At quarter-ends,
banks can reverse the increase in their balance sheet by closing part of their reverse repo contracts and using the
cash thus obtained to repay repos. This compression raises their reported leverage ratio.
The data indicate that window-dressing in repo markets is material. Data from US money market mutual
funds (MMMFs) point to pronounced cyclical patterns in banks’ US dollar repo borrowing, especially for jurisdictions
with leverage ratio reporting based on quarter-end figures (Graph III.A, left-hand panel). Since early 2015, with
the beginning of Basel III leverage ratio disclosure, the amplitude of swings in euro area banks’ repo volumes
has been rising – with total contractions by major banks up from about $35 billion to more than $145 billion at
year-ends. While similar patterns are apparent for Swiss banks (which rely on quarter-end figures), they are
less pronounced for UK and US banks (which use averages). Banks’ temporary withdrawal from repo markets is
also apparent from MMMFs’ increased quarter-end presence in the Federal Reserve’s reverse repo (RRP) operations,
which allows them to place excess cash (right-hand panel, black line). Despite the implicit floor provided by
the rates on the RRP (yellow line), there are signs of volatility spikes in key repo rates around quarter-ends (blue
line). Such spikes may complicate monetary policy implementation and affect repo market functioning in ways
that can generate spillovers to other major funding markets, especially if stress events coincide with regulatory
reporting dates
Anyway, just a few thoughts for today, as part of my ongoing self therapy for investors.
Regards,
Catch
(How’s that for a double negative - DT?)
What really strikes me is that both of us retired about the same time and about the same age and that we were truly blessed to have spent much of that period during a period of “disinflation.” Note: Disinflation does not mean “no inflation” (must be double negative day). However, it does mean “slow or decelerating inflation”. So, as dramatic as price increases may have seemed to those of us 20+ years into retirement (still trying to get my head around $60,000 pickup truck prices), imagine how horrific our experiences might have been under a protracted period of rapidly accelerating inflation.
One thing I’d suggest to younger folks is so obvious none have mentioned it. Owning is preferable to renting. Especially your place of residence. And, I think the same might apply to owning a vehicle rather than leasing where you’re having to start anew whenever lease expires.
On the one hand, it's a real concern if you're looking decades out, so it's worth considering inflation adjusted annuities. On the other hand, they may not be the best way to address this risk.
Thinking of annuities as insurance (see my long post above), ISTM one buys annuities not so much for the monthly stream of income (though that's a part), but more as real, catastrophic insurance. Where the "catastrophe" is living "too long".
That's why I'm impressed with the idea of longevity insurance. Sure, you might lose by dying early - ISTM the real loss there is the dying part, not the foregone money. Overall, it's a way to buy insurance for the real risk, without paying to insure earlier years where your being alive is more of a sure thing (at least you hope so).
Another approach, often mentioned here, is delaying SS until age 70. SS is inflation adjusted, so by pushing it out you can get larger inflation-adjusted payments to cover your minimum living expenses for the rest of your life.
An approach to bridging the gap from retirement to age 70 is, yes, to use an annuity. One you rarely hear about: a "temporary life annuity". This could make payments up to age 70 (and then stop), but only so long as you're alive. The idea is that if you don't make it to 70, you don't need those monthly payments while waiting for SS to kick in. By giving up your rights to money should you die, you need to pay less for this policy.
Here's an article referencing work by Kitces and Pfau that says that inflation-adjusted SPIAs only pay off for the relatively small percentage of people who live very long lives. I've read a better writeup (probably a Kitces column) but can't find it now. It turns out that it takes decades for the value of the inflation-adjusted policy to surpass the value of the vanilla annuity.
https://retirementincomejournal.com/article/spias-are-slow-to-pay-off-kitces-and-pfau/
If one is able to generate "enough" income through all channels; being a possible company pension, traditional IRA's, 403B's, 457's, and SS, yet still has monies for an annuity; then a consideration of "tax efficient" investments may be in place regarding taxes.
If one invests in "tax efficient" funds or whatever similar choice, tax for at least part of these of this investment type may be treated at a long term capital gains rate (annual distributions and personal withdrawals). Another benefit is that one still has access to how much money and when they choose to take a withdrawal for whatever reason.
To the best of my knowledge, payouts from an annuity are taxed as "ordinary income", with the possibility of a higher tax rate; and in particular with other payouts from other sources than may all "pile" more money into the "ordinary income" tax bucket.
Too much "ordinary income" in retirement, is none the less; a good problem to have, yes?
My 2 cents.
Note, IRA and qualified retirement plan distributions are not "income" in the sense of a steady stream of payments. They are merely tax events. Moving a non-dividend paying stock from an IRA to a taxable account (e.g. to satisfy RMD) creates a tax obligation but no income. So I would be careful in what I called "income" for cash flow purposes.
If by annuity "payouts" you mean checks from annuitizing, they are tax free to the extent that the payouts represent a return of principal, which is prorated over life expectancy (or period certain as necessary). If you mean withdrawals without annuitizing (e.g. GWLB payments), the ordering is (taxable) income first, but once you draw down to principal, return of principal is still tax free.
The opposite of Roth IRA ordering (where principal comes out first, and taxable earnings, e.g. if you haven't owned for five years, last).
Agree with your points (no tax on return of principal, etc.) I didn't intend to misdirect one's reading/understanding of my write.
If there is a sizable amount in one's/couples traditional IRA's; after the 1st year RMD ,which is about 3.65%, the percent rate creeps towards 4% within a few years.
Only saying with this, is that an individual or in particular a couple could find a mandatory withdrawal from IRA's to cause other tax events, too.
All of these points, as is the purpose of this forum; is too stimulate brain cells with current and forward thinking about "all" investing circumstances and choices available.
As I noted previous, this should be a "good problem" to have regarding taxation overall.
As we've noted prior (with this and in years past), not all choices will fit all individual circumstances. I recall you and I have traveled this road before (annuity related) with questions from others over the years.
As this house is no longer in a position to contribute through the normal employed methods of Roth IRA's, 401k's and related; if we were to inherit a sizable amount of money today, a consideration would be Fidelity's Personal Retirement Annuity.
Disclosure: this house is a 40 year Fidelity customer.
Take care,
Catch
Allow me to offer a few more thoughts on insurer safety, especially as you mentioned Lincoln Financial.
First, I regard 2008 as once in a lifetime event (at least going by the biblical 70 year span). I don't know about you, but aside from my aspirations of living forever, I don't expect to be around for the tricentennial. (An annuity probably isn't a good idea right now for anyone who does.)
But when events like that happen, they affect all financial institutions. You get shotgun weddings (JPM Chase and WaMu), and extraordinary aid across the board. That is, lots of emergency measures outside of the normal protections and procedures.
Insurance companies are not much different from banks - they take in money from creditors (policy holders, depositors), incur liabilities to those creditors, and invest the proceeds until called upon to meet those liabilities. Being similar to banks, they were similarly vulnerable. That some had to kludge their way into getting the same aid as banks I view as incidental.
Since being a bank (or holding company) was a requirement to participate in the TARP Capital Purchase Program, many ersatz banks acted to meet that formality, several at the last minute.
If the fact that some insurers accepted aid (and added regulatory supervision) at that time makes one leery of insurers generally, then what are we to think of the mutual fund industry? A large number of money managers accepted government aid in the form of "after the fact" Treasury insurance for their MMFs to prevent runs on their funds. By "after the fact" I mean that the insurance was created and offered after the Reserve Fund broke a buck. Something like being offered flood insurance after a hurricane makes landfall but before the oncoming water reaches your stoop.
Do you still trust mutual fund companies? Should we? I think so. Just as I trust the better insurers. That's not to say there isn't risk everywhere. It's just that some of it is way down on my list of things to worry about.
moneylife-with-chuck-jaffe
Interesting.
Regards,
Ted
Well not exactly, but close enough. The point is that indexed annuities are fixed annuities - their interest rate may not be known in advance, but all they're doing is paying you interest based on something well defined. These are not VAs.
You can get the same sort of product outside of an annuity with a CD or with a bond.
For example, here's a (nine page!) prospectus for a new issue JPMorgan Chase CD currently being sold through Fidelity (and probably elsewhere). It matures in seven years, at which time it pays principal (guaranteed by FDIC) and interest equal to 100% of the price appreciation of the S&P 500 (not including dividends). But this is capped at 80% (roughly 8.76% annualized). If the S&P 500 index is lower in seven years than it is on the date the CD is issued, you still get your principal back, without interest.
http://prospectus.bondtraderpro.com/$48128FJZ6.PDF
No salesperson, no commission, no insurance company to deal with. Still a lousy form of investment, but you don't need an annuity to buy these CDs.
FDIC warnings: https://www.fdic.gov/consumers/consumer/news/cnspr12/marketlinkedcds.html